In at least one respect, personal finance guru Suze Orman doesn’t believe in perfection. In a recent interview on CNBC’s Women & Wealth show, she was asked the following question: “Given your experience, do you have a perfect formula for how much should be in an emergency fund versus how much should be in retirement vs. how much should be? used for discretionary items? How much interest would you offer?’
Orman’s answer. “I’m not someone who believes you can put so much here and so much there because each of your situations is so different it’s not even funny. If you have five children, you will be different than if you have no children,” said Orman. He also noted that “you’ve got to get out of credit card debt, you’ve got to have at least an eight to 12 month emergency fund, you’ve got to fund your retirement account, and you’ve got to really get. Hold on to your money.” (Good news on the savings front: Many high-yield savings accounts are paying more now than they have in about 15 years, and you can see the best savings account rates you can get here.)
Do other money experts agree with Orman?
Many do. Indeed, Elise Foster, a certified financial planner at Harbor Wealth Management, says the perfect formula is what works for you and your situation. “There are some commonalities wise, but everyone is a little bit different,” Foster says.
And Eric Pressonia, a certified financial planner at One Up Financial, also says there’s no perfect formula. “An emergency fund should be prioritized above all else, even over saving in a 401k or IRA. I’ve seen too many cases of investors racking up credit card debt due to emergency expenses because all their savings are tied up in a retirement account,” Presonia says.
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In general, experts agree with Orman that paying down debt, saving for an emergency, and saving for retirement are critical to building financial independence and success. But the details on each may vary from professional to professional.
What Money Experts Say About How Much Emergency Savings You Need
Orman recommends saving more for emergencies than others. Indeed, the CFP Board says it’s smart to have three to six months of fixed expenses in an emergency fund. “We’re targeting a three-month starter emergency fund for clients who have multiple competing critical financial goals: buying a home, paying off debt, contributing to retirement. Once the client meets all other goals, we then increase the emergency fund target up to six months,” says Danna Jacobs, Certified Financial Planner at Legacy Care Wealth.
“If you’re younger with no cash savings, I think one to three months is a good target range to start with because it’s more attainable when you’re starting with nothing and helps build positive savings momentum as you build up “, says Eric Pressonya. Certified Financial Planner with One Up Financial. And once your emergency fund is built, Pressonia says she likes to tweak the 50/30/20 budgeting rule, which is 50% needs, 30% wants, and 20% savings. “Instead, I think the emphasis should be on saving over discretionary spending, 50% on necessities, 30% on savings and 20% on discretionary items,” Presonia says.
For his part, certified financial planner Caleb Paddock calculates needed emergency savings a little differently, using a client’s personal burn rate rather than income. For example, if a customer had $5,000 in monthly recurring expenses, here’s the savings formula they would suggest: If a single income, aim for six to 12 times your monthly expenses for a cash reserve of $30,000 to $60,000. If two incomes, target four to six times the monthly expenses, so $20,000 to $30,000 for this example,” says Paddock.
No matter how hard you try to stockpile, Orman recommends automating your savings. “I’d rather you take $50 a month or $100 a month or whatever and automate it; and you will find that you don’t miss it,” says Orman. Remember, this is a process that takes time. “The peace of mind that comes with saving even a small amount is liberating and empowering. Also, you avoid the cycle of never saving, living beyond your means, spending more on credit cards, and never getting ahead,” says Foster.
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What Money Experts Say About How Much Retirement Savings You Need
As a general rule of thumb, experts say you should aim to save 10% to 20% of your income for retirement. Working backwards is another way to calculate your approach to how much you need to save. “I decide what the income will be in retirement. Then I subtract Social Security and pension income, and for the amount I need for the remaining income, I calculate what principal will be needed in the retirement accounts. I factor in inflation and durability, both of which are estimates, and I go higher. I’m starting to use 95 and 100 as a life expectancy, and 3.5% to 4% inflation might be the range that fits the future,” says certified financial planner Mark Kinsella of Family Financial Planning Services. in Wheaton, Illinois.
But some experts prefer to stick to hard numbers. “I like the 20/40/40 rule for invested assets, which puts 20% of your invested assets in a Roth, 40% tax-deferred.and 40% taxable . This strategy gives retirees the flexibility to draw from different tax buckets to reduce tax liability in any given year,” says Cameron Brady, Certified Financial Planner at Michael Brady & Co Financial Planning.